Shareholder Class Actions
Understanding The Size And Nature Of Loss
Over the past five years Axiom Forensics has been engaged by lawyers acting for both plaintiffs and defendants in relation to a number of shareholder class actions.
The claims made relate to the circumstances in which shares (or other equity securities) are acquired and/or sold.
Most commonly, it is alleged that the defendant company issued inaccurate or incomplete information (or failed to update previously issued information), the effect being that the plaintiffs claim that they acquired shares at a price that was higher than they would have paid had the correct information been issued and/or information updated.
Part of our role on these engagements has been to assist in understanding the aggregate loss claimed to have been suffered by the class.
In this article, we set out an overview of the Axiom Shareholder Class Action Model that we have developed for this purpose.
Obtaining Shareholder Registry Data
The first step in understanding the losses claimed to have been suffered by class members is to obtain, whenever possible, a copy of the defendant company’s shareholder register (which is typically maintained by Computershare or Link Market Services).
When a company issues share capital, the Corporations Act 2001 requires that company to keep a record known as a ‘register of members’ or ‘share register’. A share register must include the following information about members:
- Date of inclusion in the register; and
- Number of shares held by that member.
Importantly, the administrator of the register (typically being either Computershare or Link Market Services) also stores information about the timing and number of shares bought and sold by each member. This is significant because the quantum of claimed share price inflation often differs depending on when the shares were purchased.
For example, if Shareholder A bought a parcel of 100 shares at a time when the shares were determined to be inflated by $1.00, before buying a second parcel of 100 shares at a time when the shares were determined to be inflated by $0.50, then that shareholder’s total loss suffered is $150 (that is, 100 shares x $1.00 plus 100 shares x $0.50).
As such, understanding the timing of when shares were bought or sold by each class member is therefore critical to accurately quantifying the claimed loss.
In circumstances where registry data cannot be obtained, we have developed a series of separate trading estimation models which seek to estimate the volume of shares traded during a relevant period using publically available information. Whilst this “estimation” approach can be useful during the early stages of an engagement, it is our suggestion that actual share trading data be obtained from the relevant administrator as soon as practicable in order to obtain a more accurate assessment of any potential loss.
After obtaining shareholder registry data, it is then necessary to develop preliminary assumptions in relation to:
- The relevant period(s) where the share price is claimed to have been inflated;
- The dollar value of the claimed inflation during each of the relevant period(s) (which may be assessed under either a ‘Constant dollar inflation’ amount and/or a ‘percentage effect inflation’ amount;
- Whether certain transactions reported in the shareholder register should be excluded from further consideration (for example, it may be appropriate to exclude ‘off-market transfers’, ‘escrow releases’ or shares acquired through rights issue(s)); and
- Whether or not the trading activity of any individual shareholders should be excluded from further consideration on the basis that they are a party related to the defendant company (such as a senior executive or dircetor) or have specifically opted out of the class.
It is important to appreciate that the output of any model can only be as accurate as the reasonableness of the underlying assumptions. The Axiom Shareholder Class Action Model has been developed such that all underlying assumptions can be updated efficiently as a matter progresses and more information comes to hand.
After inputting the relevant assumptions into the Axiom Shareholder Class Action Model, the potential total loss suffered by members of the class can be computed relatively efficiently and with a high degree of accuracy. For example:
The total size of potential loss in this illustrative example is approximately $457 million.
In our experience, it is not uncommon for the majority of the loss claimed to have been suffered to be attributable to only a small number of shareholders. In this illustrative example, approximately $401.6 million (87.9%) of the total loss suffered can be attributed to just 21 shareholders. We note that these figures are based on an actual matter we recently worked on (although we have anonymised HIN numbers, shareholder names and adjusted amounts for confidentiality purposes).
The Axiom Shareholder Class Action Model can further break down the losses suffered by each individual shareholder as follows:
Individual Shareholder Investigation
The Axiom Shareholder Class Action Model facilitates granular interrogation of each individual shareholder’s trading activity during the relevant period. In our experience, this can aid in focusing resources when trying to understand the ‘true’ drivers of the loss.
Following on from the above example, careful analysis of the shareholder who represented 65.1% of the claimed loss reveals substantial trading activity during October 2014.
Further interrogation of this particular shareholder’s purchase activity during October 2014 may identify reasons to exclude certain share purchases from the calculated loss.
For example, whilst not applicable to this particular case, in other matters we have identified certain “spikes” in share trading activity which were attributable to a series of rights issues. We understand that there are legal issues which may prevent the acquisition of shares under a rights issue from being included as part of a class member’s claimed loss.
Calculating the potential losses suffered by shareholders under the shareholder class action regime requires:
- A copy of the offending company’s shareholder register; and
- A robust financial model capable of handling the individual buy/sell share trading decisions of a significant volume of shareholders.
If you are either representing a class or defending a company in one of these matters, the Axiom Shareholder Class Action Model may be of use in better understanding the identity of particular class members and gaining clarity around the quantum of the losses claimed to have been suffered.